NIXON AND THE ECONOMY: A Delicate Balancing Act

RICHARD NIXON will probably have to move cautiously in working his will on the U.S. economy. Besides facing a Democratic-controlled Congress, the new Republican President will have to live until at least next summer with budget decisions already made by the Johnson Administration. Moreover, the narrowness of his election victory can hardly be interpreted as a mandate for sweeping economic change. Even his aides admit that Nixon will be forced into the role of an "economic neuter," as one of them puts it, during his first months in office.

As he enunciated them during the campaign, one of Nixon's main objectives is to keep the economy on a forward course while reducing the disturbing rate of inflation--currently more than 4% a year--to about 2.5%. That, in turn, would go a long way toward strengthening the position of the dollar abroad. Yet excessive zeal in combating inflation could throw the nation's economy into reverse. The new Administration, says Yale Economist Henry Wallich, a onetime economic adviser to President Eisenhower, will find that it must perform a delicate balancing act "between policies that would bring on a recession and ones that would continue inflation."

Belated Cooling. The stickiest task involves Nixon's campaign pledge to allow the 10% surcharge on federal income taxes to expire next summer--or at least to reduce it substantially. That promise may have made obvious political sense at the time, but the economic wisdom of cutting taxes is not nearly so clear. Only belatedly does the surcharge seem to be having the desired effect of cooling off the economy. As one piece of evidence that the tax is finally working, the Federal Reserve Board reported last week that the U.S. money supply grew by only 4.5% during the third quarter, barely half as fast as the quarter before. Also, the Commerce Department reported that retail sales declined in October for the second straight month.

These indicators raised expectations that the long-predicted economic slowdown would at last materialize early next year. If it does, says Economist Arthur Burns, Eisenhower's former chief economic adviser and now a key Nixon man, some sort of surtax reduction will be possible. On the other hand, a tax reduction could well touch off a new round of inflation. With the inflation threat obviously in mind, Pierre Rinfret, Manhattan economic consultant and another Nixon adviser, conceded in London last week that Nixon might conceivably have to retain the surcharge, or even raise taxes. "I don't think," said Rinfret, "that the surcharge can be eliminated easily."

Warning from Wilbur. It certainly could not be readily eliminated without corresponding reductions in the federal budget, and that task will not prove to be easy either. During the campaign, Nixon promised that he would hold increases in Government spending to $10 billion a year, which he estimated would be more than covered by $15 billion or so in new tax revenues that would be generated by the normal growth of the economy. He may be hard pressed to keep his spending increases to that both because of the increased outlays for defense that he advocates and the built-in budget boosts for items like wage increases for federal employees and expanded social security benefits.

Whatever fiscal measures he finally decides on, Nixon will then have the difficult job of selling them on Capitol Hill. Arkansas Democrat Wilbur Mills, chairman of the House Ways and Means Committee, warned early in the campaign that he would oppose elimination of the surtax "unless additional, very stringent economies are placed in effect." Mills takes an even dimmer view of the President-elect's pet scheme to offer private enterprise tax incentives for tackling pollution control, ghetto job training and slum rebuilding. He argues that such tax breaks would result in "a very material reduction in federal revenue," and flatly predicts that the new Administration "won't get anywhere" in putting them before Congress.

Nixon faces problems too when it comes to dealing with the chronic balance-of-payments deficits. During the campaign, he promised to end President Johnson's mandatory controls on foreign investment "as soon as possible." That raised the specter of a precipitate outpouring of investment funds abroad and prompted Treasury Under Secretary Frederick L. Deming, a key member of L.B.J.'s economic team, to call the proposal "the height of irresponsibility." By the same token, supporters of the Johnson Administration's free-trade policies have been concerned about intimations by Nixon's aides that the U.S. might adopt a more protectionist attitude toward some imported goods, including Japanese textiles and Canadian auto parts. Nonetheless, European businessmen and moneymen, while also worried about the possibility of restrictive trade measures, express confidence that

Nixon will work to restore international confidence in the dollar.

More Sophisticated. For all the difficulties ahead, in fact, Nixon's presidential victory was generally well received by businessmen both at home and abroad. At last week's New York Stock Exchange closing, the Dow-Jones index of 30 industrial stocks had climbed to 965.88, up 19.65 since Election Day. And the spurt, noted Ralph Creasman, president of the Lionel D. Edie & Co. investment counseling firm, would have been bigger except that "we'd already absorbed," discounted and anticipated a Nixon victory." Indeed, since the so-called "Nixon market" began its surge in August, the stock market has enjoyed a price runup of 11%.

One reason for Wall Street's favorable reaction to the Nixon victory is its expectation that the new Administration will reduce governmental control over business. After Nixon's controversial campaign attack on "the heavy-handed bureaucratic regulatory schemes" of the Johnson Administration, for example, many Wall Streeters consider the President-elect virtually duty-bound to replace Manuel Cohen, the activist chairman of the Securities and Exchange Commission, with somebody more acceptable to the securities industry.

Pleased as it is for the moment about a Republican President, the business community is far more sophisticated than it was a generation ago, and thus can no longer be expected to remain indefinitely happy simply because a Republican is in the White House. Instead, it will ultimately judge Nixon on the basis of how well the economy performs during his presidency. Obviously, an end to the Viet Nam war would help immensely by reducing strains on both the domestic economy and the U.S. payments position.

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